Apollo acquires 49% of Intel's Fab34

[SemiFunctional]

SANTA CLARA, Calif. & NEW YORK--(BUSINESS WIRE)-- Intel Corporation (Nasdaq: INTC) and Apollo (NYSE: APO) today announced a definitive agreement under which Apollo-managed funds and affiliates will lead an investment of $11 billion to acquire from Intel a 49% equity interest in a joint venture entity related to Intel’s Fab 34.

This press release features multimedia. View the full release here: https://www.businesswire.com/news/home/20240604172872/en/

Intel and Apollo Agree to Joint Venture Related to Intel’s Fab 34 in Ireland

www.intc.com

 

[Mooredaddy]

Like i've said. This reeks of desperation

 

[MKWVentures]

these deals are pretty good overall for the controlling interest. they manage it. All decision tie breakers are made by them. Intel get access to larger fab network for less money. For the minority owner, the impact is good if you get strong margins like TSMC. Bad to disasterous if margins are break even. but forcing intel to take output at cost plus protects that. The brookfield specifics are good for brookfield. I expect the same for Apollo. As long as Apollo knows all the options Intel has to manipulate the indicators (all very legally), and how to deal with that, they will be fine

 

[Mooredaddy]

these deals are pretty good overall for the controlling interest. they manage it. All decision tie breakers are made by them. Intel get access to larger fab network for less money. For the minority owner, the impact is good if you get strong margins like TSMC. Bad to disasterous if margins are break even. but forcing intel to take output at cost plus protects that. The brookfield specifics are good for brookfield. I expect the same for Apollo. As long as Apollo knows all the options Intel has to manipulate the indicators (all very legally), and how to deal with that, they will be fine

It buts them in a constrained position does it not? In boom times intel is forking over profits and in bad times they have a P/E firm breathing down their neck. Intel already has a higher cost basis then TSMC for running fabs. And now even if they do turn a profit they fork over almost half of whats left, no?

 

[nghanayem]

It buts them in a constrained position does it not? In boom times intel is forking over profits and in bad times they have a P/E firm breathing down their neck. Intel already has a higher cost basis then TSMC for running fabs. And now even if they do turn a profit they fork over almost half of whats left, no?

Would you rather make 100% of 0 revenue or 51% of something?

 

[MKWVentures]

It buts them in a constrained position does it not? In boom times intel is forking over profits and in bad times they have a P/E firm breathing down their neck. Intel already has a higher cost basis then TSMC for running fabs. And now even if they do turn a profit they fork over almost half of whats left, no?

If you want to make money sometimes you need to use other peoples money. All depends on what the "Plus" is in the cost plus. If Intel is killing and and wants more money from fab, I am sure there is a buyout clause (I havent seen the contract yet). Intel has 11B cash it did not have before. Intel needs that money.

I have looked at accounting and contract for JVs like this for a couple companies. When you add this to the breakout of foundry with billions in losses and the profitable product group.... its gets pretty complex to know where the money went. But it is still a good deal for the majority stakeholder .... Other peoples money and Intel keeps all control.

 

[hist78]

Would you rather make 100% of 0 revenue or 51% of something?

Why Fab 34 has (or will have) zero revenue? It's guaranteed to have the Intel Product/Design divisions' orders plus unknown number of external foundry customers.

 

[osnium]

If you want to make money sometimes you need to use other peoples money. All depends on what the "Plus" is in the cost plus. If Intel is killing and and wants more money from fab, I am sure there is a buyout clause (I havent seen the contract yet). Intel has 11B cash it did not have before. Intel needs that money.

I have looked at accounting and contract for JVs like this for a couple companies. When you add this to the breakout of foundry with billions in losses and the profitable product group.... its gets pretty complex to know where the money went. But it is still a good deal for the majority stakeholder .... Other peoples money and Intel keeps all control.

In your opinion, why are Apollo and Brookfield investing if it’s a good deal for Intel?

 

[nghanayem]

Why Fab 34 has (or will have) zero revenue? It's guaranteed to have the Intel Product/Design divisions' orders plus unknown number of external foundry customers.

They said the money is for filling out F34 with the rest of it's tools. Using an oversimplified example, let's say intel only had $11B to invest in IR. If they give away half of the profits they can instead buy 22B in tooling. In this example that 2nd 11B of tools don't exist and cannot generate revenue (hence why I said owning 100% of nothing). From the perspective of the whole fab you get 51% of the profits from 2x the wafers. Throw in the economics of scale and intel makes out well (assuming you fill the fab). Depending on if this is 51/49 of the whole thing or the parts of the fab that haven't been bought yet the numbers can be even better 75/25 if we assume MOD1 is 100% paid by intel and MOD2 is 50%

Of course in practice this likely does little to impact F34 capacity (but maybe the speed?). More likely than not said money will instead be used for intel's other ventures. Another oversimplified example, but bare with me. For easy math let's say SCIP paid for 50% of F52/62 in AZ and 50% of F44 in IR. Intel now has ~1.5 fabs worth of money they didn't have to fund 14A ramp faster than they can reasonably afford to if they had to borrow the money at a more expensive rate. When intel doesn't have the cash on hand to pay for Germany 1/2 then it doesn't matter if 14A is the best thing since sliced bread since all they will have is D1. Once intel can be in the situation of a TSMC where the old nodes pay for the new nodes I have to assume SCIP will no longer be needed, but until then intel is stuck with trying to make up years of underinvestment in new fab shells (see 14nm and 10nm shortages from like 2018-2022 and moving trailing edge products external to cope) and 10nm factories not really generating any profits to fund fabs on foundry nodes.

 

[Barnsley]

Can use it to prop up share price/dividends?

 

[Daniel Nenni]

Here is the transcript:

https://seekingalpha.com/article/4697449-intel-corporation-intc-bofa-global-technology-conference-transcript

Fab light? Asset light? I still do not get it.

 

[hskuo]

Why Fab 34 has (or will have) zero revenue? It's guaranteed to have the Intel Product/Design divisions' orders plus unknown number of external foundry customers.

One of Fab34 customer would be MediaTek, announced about a year ago.

 

[hist78]

Here is the transcript:

https://seekingalpha.com/article/4697449-intel-corporation-intc-bofa-global-technology-conference-transcript

Fab light? Asset light? I still do not get it.

"I think what's important to note is, this is likely the last SCIP deal that we are contemplating. And so we did a SCIP1, we did a SCIP2. It really helps us protect the balance sheet and prosecute the strategy, during a period of time where we know we're playing catch-up and our P&L and cash flow is under-earning."

Intel desperately needs cash to save its deteriorating financial situation. For example, to continuously pay dividends while in fact it can't afford to do so. Another problem is Intel is required to match grants US, Germany, Ireland, and Israel government give to it to complete those new fabs. It's a huge amount of cash that will keep biting into Intel's financial health.

"Fab light? Asset light? I still do not get it."

One thing for sure, it's heavy in financial engineering.

 

[hist78]

They said the money is for filling out F34 with the rest of it's tools. Using an oversimplified example, let's say intel only had $11B to invest in IR. If they give away half of the profits they can instead buy 22B in tooling. In this example that 2nd 11B of tools don't exist and cannot generate revenue (hence why I said owning 100% of nothing). From the perspective of the whole fab you get 51% of the profits from 2x the wafers. Throw in the economics of scale and intel makes out well (assuming you fill the fab). Depending on if this is 51/49 of the whole thing or the parts of the fab that haven't been bought yet the numbers can be even better 75/25 if we assume MOD1 is 100% paid by intel and MOD2 is 50%

Of course in practice this likely does little to impact F34 capacity (but maybe the speed?). More likely than not said money will instead be used for intel's other ventures. Another oversimplified example, but bare with me. For easy math let's say SCIP paid for 50% of F52/62 in AZ and 50% of F44 in IR. Intel now has ~1.5 fabs worth of money they didn't have to fund 14A ramp faster than they can reasonably afford to if they had to borrow the money at a more expensive rate. When intel doesn't have the cash on hand to pay for Germany 1/2 then it doesn't matter if 14A is the best thing since sliced bread since all they will have is D1. Once intel can be in the situation of a TSMC where the old nodes pay for the new nodes I have to assume SCIP will no longer be needed, but until then intel is stuck with trying to make up years of underinvestment in new fab shells (see 14nm and 10nm shortages from like 2018-2022 and moving trailing edge products external to cope) and 10nm factories not really generating any profits to fund fabs on foundry nodes.

Intel will complete the fab 34 soon and has spent about $18.4 billion on it already. This Apollo deal will allow Intel to extract $11 billion out to "protect the balance sheet and prosecute the strategy". Basically Intel needs a lot of cash to improve its financial standing. IMO, it's still not enough after this Apollo deal and Intel may need to do some more drastic actions quick.

Source: https://semiwiki.com/forum/index.php?threads/apollo-acquires-49-of-intels-fab34.20361/post-70949

 

[cheesehead]

One sentence in the press release caught my eye:

Under the agreement, the joint venture will have rights to manufacture wafers at Fab 34 to support long-term demand for Intel’s products and provide capacity for Intel Foundry customers.

Apart from the given explanation on the financial terms, could such a move be used to provide credibility to IFS´ claim to be an independent company? While Intel will still control operations, giving a 3rd party such an extensive stake might convince external customers about their intentions.

I would consider such a move the probably most risky and expensive marketing move of all time, yet I am curious to hear your opinions on the consequences for IFS reputation on the market.

 

[MKWVentures]

Here is the transcript:

https://seekingalpha.com/article/4697449-intel-corporation-intc-bofa-global-technology-conference-transcript

Fab light? Asset light? I still do not get it.

Its not fab lite or anything else. it is just a financing tool. And when you look at spreadsheets its a good one. half the money, all the control. I recommend these to companies on both side (minority and majority ownership) and they are win-win (until the divorce.... then the lawyers win LOL). The fact that it becomes a separate LLC, not wholly owned is even better. Its just a financing tool when you are not rolling in cash. I can draw up a 2 option chart that shows pros and cons.

 

[MKWVentures]

One sentence in the press release caught my eye:



Apart from the given explanation on the financial terms, could such a move be used to provide credibility to IFS´ claim to be an independent company? While Intel will still control operations, giving a 3rd party such an extensive stake might convince external customers about their intentions.

I would consider such a move the probably most risky and expensive marketing move of all time, yet I am curious to hear your opinions on the consequences for IFS reputation on the market.

its not marketing. just finance. and IFS is not an independent company..... yet. It is an accounting tool.

 

[hist78]

Its not fab lite or anything else. it is just a financing tool. And when you look at spreadsheets its a good one. half the money, all the control. I recommend these to companies on both side (minority and majority ownership) and they are win-win (until the divorce.... then the lawyers win LOL). The fact that it becomes a separate LLC, not wholly owned is even better. Its just a financing tool when you are not rolling in cash. I can draw up a 2 option chart that shows pros and cons.

The biggest question is what's the return and other guarantees Intel obligated to this deal and Apollo. These information are confidential and we won't be able to find out. But one thing for sure is the true direct and indirect cost will be higher than the Intel-Brookfield Arizona deal.

In the Intel-Brookfield Arizona deal, the fab and equipment are owned by the "JV". But in the Apollo case, the new "JV" doesn't own the fab or equipment at all. Apollo's $11 billion got the "right" to manufacture Intel 3 and Intel 4 products with undisclosed amount of guaranteed profit. It doesn't own the fab and equipment at all.

 

[MKWVentures]

@hist78 @Daniel Nenni

From what I understand there will be a lease agreement, a services agreement, and a capital spending agreement like in Kioxia, toshiba, WD. after that, I would need to hire 100 lawyers to figure out who decides where the cost goes for equipment depreciation, the coffee in the conference rooms and the stairmaster maintenance at the gym.

I love any contract that starts with a goofy named LLC formed in the Cayman islands

I have read a lot of these JV agreements 8K reports.... this one is pretty interesting.

 

[hist78]

@hist78 @Daniel Nenni

From what I understand there will be a lease agreement, a services agreement, and a capital spending agreement like in Kioxia, toshiba, WD. after that, I would need to hire 100 lawyers to figure out who decides where the equipment depreciation, the coffee in the conference rooms and the stairmaster maintenance at the gym.

I love any contract that starts with a goofy named LLC formed in the Cayman islands

I have read a lot of these JV agreements 8K reports.... this one is pretty interesting.

Because Intel will still own the Ireland fab and equipment, the depreciation will reflect on the Intel accounting book, not on the JV's.